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Pondering National Security Concerns as a Basis for Trade and Investment Barriers

In March, United States (US) President Donald Trump decided to raise tariffs on steel by 25 percent and on aluminum by 10 percent for national security reasons. This raised concerns about possible retaliation by US trading partners that might lead to a damaging cycle of trade actions that shrank world trade and spurred a global depression. US national security economic-related worries pertain not only to trade but also to foreign direct investment (FDI), especially high-tech FDI, because an increasing number of civilian technologies can be adapted for military use.

To illustrate, carbon textiles for golf shafts can be used for jet fighter wings while semiconductors for satellite telecommunication equipment can be used for jet fighter radar. This presents a problem for multinational corporations (MNCs) in emerging economies like China that want to buy advanced developed country technologies to enhance their competitiveness. This is because the aforementioned anxieties are driving developed nations to strengthen their FDI controls. For example, the US, Germany, and Japan have adopted new legislation or revised existing legislation to expand the number of industrial sectors obligated to report, in advance, M&A or the other forms of FDI by MNEs from other nations. FDI-related national security concerns are legitimate given the increasing role of new technologies. However, the way President Trump is using such concerns to justify trade protections fosters worries about the potential for the abusive application of the concept. Although WTO rules explicitly allow for trade restrictions based on national security rationales, countries have almost never used this justification. The WTO should initiate a discussion on the place of national security concerns in trade and investment rules. This would produce a healthier business environment for MNCs, many which are dependent on global value chains that could be damaged by protectionism based on alleged national security concerns.